Will China Have the World’s Largest Economy by 2030?

14 December 2012

On Monday, the National Intelligence Council released its fifth “Global Trends” report. Among its conclusions, the study predicted that the Chinese economy would surpass the American one to become the world’s largest “a few years before 2030.”

The report, a blend of analysis from the American intel community and experts in almost 20 other countries, is consistent with most assessments of the subject. The World Bank, for instance, made the same prediction (pdf) this year.

As the Global Trends report notes, predicting the future is “an impossible feat,” but spotting the flaws in this report is quite easy. For one thing, its recommendations rest on a flawed premise, that “China’s current economic growth rate” is “8 to 10 percent.” Beijing’s National Bureau of Statistics claims that growth in the third quarter of this year was 7.4 percent, and that calculation is highly debatable.

By far the best indicator of Chinese economic activity is the production of electricity. In the third quarter of this year, the average monthly increase in electricity production was just 2.1 percent. And electricity growth was on a downward trend at the end of the quarter. In September, the growth of electricity was just 1.5 percent.

Because the growth of electricity historically outpaces the growth of gross domestic product, it is unlikely that China’s economic growth could have been much beyond zero during the quarter. And as bad as recent electricity numbers were, there is growing evidence, documented in the New York Times in June, that they were inflated to make the economy look better than it actually was.

Analysts say that in the last few months the Chinese economy has resumed its high-growth pattern and that the problems evident over the last year will soon be forgotten. Yet this year’s slump appears to be more than just a momentary downturn. On the contrary, it looks like the beginning of a decades-long slide.

For one thing, the three principal reasons for China’s growth over the last three decades—continuous reform, benign international environment, and favorable demography—no longer exist. And Chinese leaders cannot just wave a wand and create new conditions for growth. In fact, the anti-reformist bent of the newly unveiled Politburo Standing Committee, the apex of Chinese political power, makes positive change look unlikely.

The triumph of the hard-liners means that, when China needs economic reform the most, the political system will be least able to deliver it. China has progressed about as far as it can within its existing political framework. Today, there is a growing recognition that fundamental economic restructuring cannot occur unless there is far-reaching political reform, reform certainly more ambitious than the “inner-party democracy” that leaders like to talk about. Yet meaningful political reform is completely off the table, as the disappointing lineup of the new Standing Committee makes clear.

China is now trapped in self-reinforcing—and self-defeating—feedback loops. In one of these loops, a slumping economy is creating a crisis of legitimacy. The legitimacy crisis, in turn, is causing a wide-ranging political crackdown. The crackdown makes reform impossible. The lack of reform prevents long-term economic growth.

For China to break out of this loop, it must move in a direction that it has not been able to go for years. New leader Xi Jinping, speaking during his recent Guangdong Province tour, said officials should “allow no delay” in economic restructuring. That’s a hopeful sign, but Chinese leaders typically talk big in their first days after taking over.

Xi may be hoping to launch bold reforms to sustain growth, but at this moment he is likely to be busy further consolidating power and maintaining political stability. In other words, he is in no position to sponsor change. His predecessor, Hu Jintao, and his premier, Wen Jiabao, were considered economic reformers but in their decade in office they only implemented one substantial reform, the abolition of the agricultural tax. Apart from that change, which ultimately caused more harm than good, they never got around to fundamental restructuring.

Perhaps Xi Jinping will end up being a transformational figure. Yet we have to remember each leader of the People’s Republic has been weaker than his predecessor, and there is little to indicate this pattern will be broken now. Unless Xi can remake Communist Party politics—most unlikely given the composition of the new Standing Committee and the “dead hand” of former leaders who refuse to relinquish power—China will be stuck with a half-reformed economy dominated by entrenched interests. And in these circumstances, the country will not be able to sustain the growth necessary to propel its economy past the American one in less than 20 years.

Michael Totten on Iran, Tom Duesterberg on US trade, Alan Johnson, Dave Rich, and Michael Zantovsky on Europe in crisis, Nancy McEldowney on US diplomacy, Dalibor Rohac on libertarians and foreign policy, and more.